As China Flexes Muscle, Obama Frets Over Rival’s Weakness

A man walks past residential buildings in the Pazhou district of Guangzhou. After four years of government restrictions to cool the housing market, home sales and property construction are sliding and have become a drag on the economy, which expanded at the slowest pace in six quarters in the first three months of the year. Photographer: Brent Lewin/Bloomberg

June 30 (Bloomberg) -- China is tailgating Japanese
warplanes, playing chicken with Vietnamese ships and questioning
America’s toughness. Yet it isn’t Chinese strength that most
worries President Barack Obama, it’s Chinese fragility.

As China’s economy grows at its slowest pace in 24 years,
the country’s domestic strains are drawing increased attention.
While Americans stew over the prospect of being eclipsed by a
new superpower, their president frets about instability in the
world’s second-largest economy.

“We welcome China’s peaceful rise,” Obama said in a
recent NPR interview. “In many ways, it would be a bigger
national security problem for us if China started falling apart
at the seams.”

Though no one expects that to happen any time soon -- if
ever -- Chinese President Xi Jinping confronts an array of
potential triggers for unrest. After more than three decades of
growth that has raised per capita income to more than 17 times
its 1978 level, China’s breakneck change is only intensifying.

“China is undertaking massive transformations that are
necessary for modern society, but in every case are socially
destabilizing,” said Kenneth Lieberthal, who handled Asian
affairs in President Bill Clinton’s White House. “And they’re
doing every one of them at a pace, scope and scale no country
has ever tried before.”

High Stakes

The U.S. has a great deal riding on the outcome. China is
the single largest holder of U.S. debt with $1.3 trillion in
Treasury securities, and Sino-U.S. trade last year topped $562
billion, up 38 percent from five years earlier. In an extreme
scenario, major turmoil could spark massive refugee flows or
even endanger control of China’s estimated 250 nuclear warheads,
said Lieberthal, a senior fellow at the Brookings Institution.

“That’s not a future you want to contemplate,” he said.

Most analysts don’t anticipate China facing such a
situation. The country’s power and prosperity seem to expand by
the day and are at relative heights last witnessed perhaps two
centuries ago.

Awareness of China’s weak spots nonetheless shapes U.S.
policy, said, said Ely Ratner, former lead political officer on
the State Department’s China desk. The U.S. cooperates with
China on developing clean energy, equipping a sometimes-rival to
meet its domestic goals. And while irritating Chinese leaders by
talking about human rights, the U.S. stops short of backing
direct challenges to Communist Party rule.

“The U.S. very much wants to support China’s stability and
economic growth,” said Ratner, a senior fellow at the Center
for a New American Security. “We don’t engage in certain
activities that would undermine their economic and political
stability, in part because it wouldn’t be in our interest.”

U.S.-China Meeting

The cooperative dimension of the relationship will be on
display July 9-10 during the next meeting of the Strategic &
Economic Dialogue. U.S. Treasury Secretary Jacob Lew and
Secretary of State John Kerry and Chinese Vice Premier Wang Yang
and State Councilor Yang Jiechi will be co-chairmen.

As U.S. officials arrive in Beijing for the talks, forces
unleashed by China’s pell-mell modernization present new
challenges. More than 1 million people each month are migrating
from farms to cities, leaving behind everything they know for an
uncertain future.

Since 2004, China’s urban numbers have grown by 200 million
people, akin to the population of Brazil, and the government
plans to shift more people to the cities. By 2030, China will
have 1 billion city-dwellers, up from 731 million today,
according to the World Bank.

Implicit Bargain

While the movement from rural to urban areas generally
increases income, it’s socially destabilizing and alienating,
said Lieberthal.

Since the 1989 Tiananmen Square protests, China’s Communist
Party has preserved social stability with a mixture of economic
growth and authoritarian muscle. The foundation of public order
is an implicit bargain: The party retains its monopoly on power
in return for providing an ever-better standard of living.

That bargain is now under pressure. Environmental damage --
air pollution that a government adviser this year labeled
“unbearable” along with water shortages -- undercuts the
notion that life is improving. In the eastern city of Zhongtai,
60 people were arrested last month after protests against a
proposed waste incinerator turned violent with police and
private cars overturned, according to state-run People’s Daily.

The government is engaged in a transition to a new economic
model, which will require a downshift to slower, more
sustainable growth than the 10 percent annual average between
2005 and 2011.

Slowing Growth

“A lot of the stability in China is growth-dependent, so
the Communist Party’s legitimacy base is rather narrow,” said
Yasheng Huang, founder of the China Lab at the Massachusetts
Institute of Technology. “The probability of instability
increases fairly substantially when growth slows down.”

In the first quarter, the economy eased to a 7.4 percent
annual growth pace en route to 5 percent by 2026, according to
the State Council’s Development Research Center and the World
Bank. That comes after a three-decade expansion that lifted some
boats higher than others: China’s rich-poor gap is wider than in
the U.S., according to a recent University of Michigan study.

Economic reforms aimed at giving market forces a decisive
role in allocating resources will make losers of individuals and
institutions that have profited from the current system.
Allowing prices of labor, capital and energy to rise may
“challenge the commitment of top leaders to the reform
process,” wrote economist Barry Naughton, a China specialist at
the University of California, San Diego.

Credit Dependence

The task is complicated by the need to wean the economy
from its dependence on credit. Since the 2008 financial crisis,
China’s debt has risen to 245 percent of gross domestic product,
according to a June 12 report by Standard Chartered Bank.

China’s leaders have their own worries. Xi has unleashed an
anti-corruption drive targeting high-ranking party and military
officials in what may be the broadest crackdown in the party’s
history.

The latest victim of the corruption purge is Liu Tienan,
former deputy director of the economic planning ministry, whom
prosecutors said will be tried on charges of accepting bribes.
Liu, 59, accepted what prosecutors said were “extremely large”
payments.

Still, the party has managed to hold together a country of
1.3 billion people journeying from deprivation to prosperity.
Martin Whyte, a Harvard University sociologist, compared survey
data on Chinese attitudes in 2009 and 2004 and found no evidence
of what he called the “social volcano” view.

Dismissing U.S.

“Popular acceptance of current inequalities remains
widespread, despite continuing increases in China’s income
gaps,” he concluded.

China’s wealth has translated into a stronger military and
more assertive regional posture. Chinese fighter jets have
buzzed Japanese surveillance planes over disputed East China Sea
islands while Chinese naval vessels have jostled Vietnamese
boats in waters that both sides claim in the South China Sea.

Earlier this month, Chinese bravado bubbled over at a
regional security conference in Singapore. Major General Zhu
Chenghu, a professor at China’s National Defense University,
warned U.S. allies in Asia not to count on a strong American
presence in the region, likening the U.S. response to the
Ukraine crisis to “erectile dysfunction.”

Soothing Suspicions

Rather than indicating genuine concern over China’s
stability, Obama’s comments may reflect an effort to soothe
Chinese leaders’ suspicions about the president’s decision to
devote more attention to Asia, said Andrew Nathan, a China
specialist at Columbia University in New York.

Chinese leaders view Obama’s so-called “rebalance” as a
sign he wants to prevent the emergence of a rival superpower. By
underscoring the American stake in a unified, prosperous China,
Obama may be trying to ease such worries.

China’s leaders are aware of their vulnerabilities. Though
the government stopped releasing official protest tallies in
2005, it’s clear that public disturbances happen daily. Sun
Liping, a professor at Tsinghua University, estimated three
years ago that there had been 180,000 protests, strikes, riots
and other “mass incidents” in 2010, twice as many as in 2006.

“They face some very serious social order challenges,”
said Murray Scot Tanner, senior research scientist in the China
Studies Division of CNA Corp., a research group in Arlington,
Virginia. “And some of them appear to be getting worse.”